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Emerging Lessons on Fighting the Financial Crisis
Emerging Lessons on Fighting the Financial Crisis - WSJ.com
*
By DAVID WESSEL
Although few realized it at the time, the devastating financial crisis began when money markets seized up in August 2007, prompting the first responders at the Federal Reserve and European Central Bank to act. With the modicum of hindsight that three years offer, what do we know now that we didn't know then?
A few lessons are widely accepted: Unfettered, poorly supervised finance can be dangerous to economic growth. Bankers and financial engineers do what rules encourage and permit, even if it means trouble later. Regulation was less than optimal, if not negligent. And borrowing heavily in good times in the hope they'll last forever is as imprudent as it sounds for homeowners and big bank CEOs.
A few other conclusions, though, are in dispute or are underappreciated. Here are three:
Government, which did fail to head off the crisis, saved us from an even worse outcome.
Hostility to the Bush-Paulson-Geithner-Bernanke (and largely Obama-blessed) bank bailouts, Obama fiscal stimulus and Fed meddling in markets is proof the public doubts this. (Full disclosure: My book, "In Fed We Trust," credits the Fed with a major role in averting another Depression.) Experts debate whether the Treasury and Fed were too soft on the banks and the bankers when they rescued them, about how much the Obama stimulus accomplished, and whether it was the right size and shape.
Those important arguments obscure the really big question: If the government hadn't done what it did, would unemployment be higher and the recession have been deeper and longer?
No one can answer a what-if question with certainty, and those skeptical of the potency of government spending won't be persuaded by economic models that assume government spending is potent.
But we know now that the economy was imploding in late 2008. We know now with detail how paralyzed financial markets were, and how rotten were the foundations of some big banks. We know now that even after all the Fed has done, we still risk devastating deflation.
So the short answer has to be: Yes, it would have been far worse had the government failed to act.
The biggest single bill to taxpayers will come not from a bank bailout, but from mortgage giants Fannie Mae and Freddie Mac.
Most people believe big Wall Street banks got bailed out and continue to profit from low interest rates. That's true, but many banks have paid back taxpayers with interest. Fannie and Freddie, though, burdened by huge mortgage portfolios, have taken $145 billion so far. In a new analysis, Alan Blinder of Princeton University and Mark Zandi of Moody's Analytics put the ultimate price for saving them at $305 billion.
That compares with $71 billion in estimated costs to the Federal Deposit Insurance Corp. for closing failing banks, $38 billion for American International Group, $29 billion for General Motors and its finance arm, GMAC, and somewhere between zero and a profit for banks in which taxpayers invested directly, according to the Blinder-Zandi calculations.
The government didn't nationalize the banks. Someday, it will sell its stake in GM. But it nationalized the mortgage market and hasn't found a way out. So taxpayers keep pumping money into Fannie and Freddie at a rate of greater than $1 billion a week.
The overall cost to Americans as taxpayers looks less than feared initially; the human and economic toll greater.
In narrow budget terms, the rescue of the financial system won't cost as much an initially estimated. The Congressional Budget Office has cut its estimate of the ultimate cost of the Troubled Asset Relief Program (which doesn't include Fannie or Freddie) to $109 billion from $350 billion and probably will reduce it further later this month. Bank losses are simply less than initially thought. In October 2009, the International Monetary Fund estimated U.S. banks would take write-downs of $1.085 trillion. By April 2010, it had reduced that by almost 20% to $885 billion. Officials at the Fed whisper that they may not lose a nickel on all their extraordinary lending.
But only the profoundly pessimistic in August 2007 imagined how deep and prolonged the recession would be, how much federal tax revenues would fall and thus how much the government would borrow, and how many would be out of work for so long. "The most pressing danger we now face is unacceptably weak growth and persistent unemployment rather than outright economic collapse," Peter Orszag said in his last speech as White House budget director.
So the good news is that we're not in a Great Depression. The bad news is that an army bigger than the entire population of Los Angeles has been out of work for a year—4.3 million people—and that just counts those still looking for work.
No wonder there's so much skepticism about the efficacy of fiscal stimulus, and such strong resistance to even think about doing more.
Write to David Wessel at [email protected]
Emerging Lessons on Fighting the Financial Crisis - WSJ.com
*
By DAVID WESSEL
Although few realized it at the time, the devastating financial crisis began when money markets seized up in August 2007, prompting the first responders at the Federal Reserve and European Central Bank to act. With the modicum of hindsight that three years offer, what do we know now that we didn't know then?
A few lessons are widely accepted: Unfettered, poorly supervised finance can be dangerous to economic growth. Bankers and financial engineers do what rules encourage and permit, even if it means trouble later. Regulation was less than optimal, if not negligent. And borrowing heavily in good times in the hope they'll last forever is as imprudent as it sounds for homeowners and big bank CEOs.
A few other conclusions, though, are in dispute or are underappreciated. Here are three:
Government, which did fail to head off the crisis, saved us from an even worse outcome.
Hostility to the Bush-Paulson-Geithner-Bernanke (and largely Obama-blessed) bank bailouts, Obama fiscal stimulus and Fed meddling in markets is proof the public doubts this. (Full disclosure: My book, "In Fed We Trust," credits the Fed with a major role in averting another Depression.) Experts debate whether the Treasury and Fed were too soft on the banks and the bankers when they rescued them, about how much the Obama stimulus accomplished, and whether it was the right size and shape.
Those important arguments obscure the really big question: If the government hadn't done what it did, would unemployment be higher and the recession have been deeper and longer?
No one can answer a what-if question with certainty, and those skeptical of the potency of government spending won't be persuaded by economic models that assume government spending is potent.
But we know now that the economy was imploding in late 2008. We know now with detail how paralyzed financial markets were, and how rotten were the foundations of some big banks. We know now that even after all the Fed has done, we still risk devastating deflation.
So the short answer has to be: Yes, it would have been far worse had the government failed to act.
The biggest single bill to taxpayers will come not from a bank bailout, but from mortgage giants Fannie Mae and Freddie Mac.
Most people believe big Wall Street banks got bailed out and continue to profit from low interest rates. That's true, but many banks have paid back taxpayers with interest. Fannie and Freddie, though, burdened by huge mortgage portfolios, have taken $145 billion so far. In a new analysis, Alan Blinder of Princeton University and Mark Zandi of Moody's Analytics put the ultimate price for saving them at $305 billion.
That compares with $71 billion in estimated costs to the Federal Deposit Insurance Corp. for closing failing banks, $38 billion for American International Group, $29 billion for General Motors and its finance arm, GMAC, and somewhere between zero and a profit for banks in which taxpayers invested directly, according to the Blinder-Zandi calculations.
The government didn't nationalize the banks. Someday, it will sell its stake in GM. But it nationalized the mortgage market and hasn't found a way out. So taxpayers keep pumping money into Fannie and Freddie at a rate of greater than $1 billion a week.
The overall cost to Americans as taxpayers looks less than feared initially; the human and economic toll greater.
In narrow budget terms, the rescue of the financial system won't cost as much an initially estimated. The Congressional Budget Office has cut its estimate of the ultimate cost of the Troubled Asset Relief Program (which doesn't include Fannie or Freddie) to $109 billion from $350 billion and probably will reduce it further later this month. Bank losses are simply less than initially thought. In October 2009, the International Monetary Fund estimated U.S. banks would take write-downs of $1.085 trillion. By April 2010, it had reduced that by almost 20% to $885 billion. Officials at the Fed whisper that they may not lose a nickel on all their extraordinary lending.
But only the profoundly pessimistic in August 2007 imagined how deep and prolonged the recession would be, how much federal tax revenues would fall and thus how much the government would borrow, and how many would be out of work for so long. "The most pressing danger we now face is unacceptably weak growth and persistent unemployment rather than outright economic collapse," Peter Orszag said in his last speech as White House budget director.
So the good news is that we're not in a Great Depression. The bad news is that an army bigger than the entire population of Los Angeles has been out of work for a year—4.3 million people—and that just counts those still looking for work.
No wonder there's so much skepticism about the efficacy of fiscal stimulus, and such strong resistance to even think about doing more.
Write to David Wessel at [email protected]
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